Luxury business : responding to the crisis

International Kpmg

Description

Many luxury goods companies are in the grip of a double crisis. A declining economy has hit sales, while a financial credit crisis has made debt difficult and costly to raise and service. The result is that many luxury companies find themselves in a liquidity crisis that requires urgent remedial action to survive.

Sujets

• Luxe
• Étude
• Produit
• KPMG
• Business

Informations

• Publié par: kpmg
• Publié le: 01 juin 2011
• Nombre de lectures: 192
• Langue: English

Extrait

Luxury business: responding to the crisis KPMG INTERNATIONAL Contents Executive summary 1 Luxury business: responding to the crisis 2 Luxury remains vulnerable 3 The credit crisis persists 3 The 'golden rules' 5 Cash flow forecasts are weak 8 Conclusion: a roadmap for survival 9 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Luxury business: responding to the crisis 1 Executive summary Many luxury goods companies are in • Cut costs intelligently. Cutting results, and running a 13-week the grip of a double crisis. A declining the right costs is difficult. While rolling forecast reviewed daily. economy has hit sales, while a financial continuous cost reduction may be • In the case of distressed companies credit crisis has made debt difficult and required for survival, it has to be with an international network and costly to raise and service. The result achieved without reducing quality different IT systems, a move to is that many luxury companies find or effective marketing spend. centralized cash pooling may be themselves in a liquidity crisis • Maintain strategic investment. necessary, as well as moving to cut that requires urgent remedial action Fear of increasing indebtedness in a operations that are burning cash, to survive. debt-adverse market is leading some prioritizing solvent clients with During the first two quarters of 2009 companies to freeze investment. discounts, implementing factoring stock markets have staged a partial That may keep stock market to reduce payment times, and recovery, and the rate of decline in investors happy in the short term, considering more sale and property prices and in unemployment but eventually it can undermine leaseback of assets. has moderated. Yet the corporate a company’s competitive position. Significant improvements are often credit crisis has not gone away. Most • Manage liquidity. Although liquidity achieved quickly, but making results companies in financial distress will still has become the leading issue for sustainable requires the adoption of need to revisit their market positioning, CFOs, cash management in many a ‘liquidity mindset.’ The opportunity their cost cutting strategies and companies remains weak. Luxury is to achieve improvements over the their investment plans, and above companies, accustomed to a focus medium-and long-term; the challenge all improve their cash management, on product and sales, may be is to make cash management become if they are to survive. weaker than most. Acting to improve a natural part of everyday life for In mid-2009 companies continue liquidity must therefore be at the everyone in the company. to enter financial crisis. The signs of top of the agenda. approaching distress include missed Liquidity forecasting must play a budget targets, falling margins, key part in avoiding financial crisis: worsening working capital and according to the 2008 Cash & Working increased reliance on trade credit, Capital Survey, carried out by KPMG while supplier conditions tighten. in the U.K., but also covering U.S. and Companies faced with these conditions Europe, many companies have a very should follow four ‘golden rules’ poor record of forecasting what cash of survival. they will have, and where and when theve it. • Revise market positioning. Companies faced with falling sales • KPMG's Advisory practice often persist for far too long with recommends that companies extended product portfolios or establish a task force dedicated business lines that no longer make to cash flow improvement, setting sense: rapid repositioning is vital. targets and paying bonuses on © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 Luxury business: responding to the crisis Luxur The credit crisis that has engulfed KPMG's Fashion & Luxury Global Index 2001-2009 businesses of all kinds has hit luxury companies particularly hard. Many well- USD 160 Stock known names have been driven to the depreciation Economic market Reduced downturn brink of insolvency. KPMG believes slowdown 140 overseas that for many more, survival will travel Declining consumer Financial require a drastic re-appraisal of the 120 confi dence crisis Iraq way they do business. confl ict 100 Robust The business landscape for all Subprime global 80 mortgage consumer companies has changed out economy crisis Recovering of all recognition in the last 12 months. consumer 60 Sept 11 The global credit system has stopped SARS confi dence functioning. Very large companies 40 including many banks have come close to bankruptcy. Stock markets MSCI (€) Index F&L Global have fallen steeply, growth in mature and emerging markets has declined Source: KPMG analysis of Bloomberg data; Morgan Stanley Composite Index Note: Updated: 22/05/09 and in many cases turned negative. Commodity prices have fallen, and Only a year ago many luxury real interest rates have been reduced companies believed that their brand to near zero. power and the high net wealth of Adding to the sense of a crisis of their customers meant that they were confidence, the financial system that largely insulated from what happened services the free market is broken. in the broad economy. The idea was Where capital was formerly plentiful supported by the fact that luxury and cheap, now the financing needs brand owners had delivered higher of companies are getting more and sales growth than other consumer more complex. Some companies companies since the end of the have benefited from these changes. dotcom bust, and that their share But most have suffered. Many good prices had tended to hold companies are at risk of bankruptcy. up when other segments of the market faltered. Perhaps the most important aspect of Events of the last year have shown this downturn – and the reason that that luxury companies are at least so many companies are struggling as vulnerable as other consumer – is that the broad economy is companies in a recession. Middle-implicated. Whereas the last downturn income consumers have reined in their that followed the dotcom bust discretionary spending sharply. The was essentially the unwinding of very rich have seen their net worth a corporate investment bubble, in dramatically reduced by the fall this downturn the consumer is over­ in stock markets and property leveraged. Consumer debt takes values, decimating demand for a long time to correct, and when super-luxuries like yachts, cars and final demand is so weak, the whole property-related purchases. economy suffers. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Jun-09 Luxury business: responding to the crisis 3 Luxury remains vulnerable KPMG's Fashion & Luxury Global Index 2008-2009 KPMG's Global Fashion & Luxury Index reveals the correlation of luxury 5 -Jun 5-Jul 5-Aug 5-Sep 5-Oct 5-Nov 5-Dec 5-Jan 5-Feb 5-Mar 5-Apr 5-May 5-Jun business with the broad economy. The index tracks the share prices of (10)% 60 fashion and luxury companies on 10 different stock exchanges and in (20)% different market segments – from (30)% basic fashion, to high luxury, to (40)% top-end retailers. (50)% The graph on page 2 shows the (60)% index performance versus a broad MSCI (€) Index F&L Global global stock market index, since Source: KPMG analysis of Bloomberg data; Morgan Stanley Composite Index 2001. It suggests that there is indeed a correlation between the luxury index and measures like economic For some luxury companies the growth, currency fluctuations and pressure has come from the consumer confidence. It shows combination of falling sales at a time that in times of growth, luxury has of rising finance costs. Many family performed somewhat better than owned luxury brand owners began to the average, shown by the Morgan sell stakes to private equity investors Stanley Composite Index. But it is also in recent years as part of a search clear that luxury companies feel what for expansion capital, taking on large everyone else feels: when average amounts of debt in the process. The performance falls, luxury falls. credit crisis has dramatically increased The credit crisis persists the cost of servicing or rolling over During the first two quarters of 2009 this debt, and in some cases the stock markets have staged a partial combined rise in finance costs and fall recovery, and the rate of decline in in sales has pushed companies close property prices and in unemployment to collapse. has moderated. Yet the credit crisis